Fiscal worries drive euro lower; stocks fall

By Natsuko Waki

LONDON (BestGrowthStock) – The euro hit a seven-month low against the dollar on Thursday as concerns about Greece’s fiscal problems spread to other highly-indebted euro zone countries, while world stocks fell broadly.

Sterling jumped after the Bank of England halted its pro-growth program of buying government bonds, as expected, taking the first step toward normalizing policy. Both the BoE and the European Central Bank left interest rates unchanged, underscoring generous liquidity conditions would remain.

The premium investors demand to hold government debt issued by peripheral countries such as Greece, Portugal and Spain rather than benchmark German bunds rose again. The cost of insuring Portuguese debt against default hit a record high.

The European Union said on Wednesday Greek plans to cut the budget gap from 12.7 percent of gross domestic product in 2009 to below 3 percent in 2012 would not be easy to implement but vowed to hold Athens to its pledges.

“The euro remains vulnerable and the market has now turned its attention to Spain and Portugal. Rallies have been short-lived and I am targeting a move toward $1.3745 in the short-term,” said BNP currency strategist Ian Stannard.

The euro fell (Read more about the trembling euro. ) as low as $1.3827, its lowest since early July while the dollar (.DXY: ) rose 0.3 percent against a basket of major currencies.

The 10-year Portuguese/German government bond yield spread widened nine basis points on the day to 154 basis points. The equivalent Greek spread widened 12 basis points to 360 bps before coming back in while the Spanish spread edged out to 93 bps from 91 bps.

Political tension in Portugal over a regional spending bill and a climbdown by the Spanish government over pension reform added to the woes of peripheral euro zone states facing huge challenges to curb budget shortfalls.

“Small irregularities in fiscal or funding spheres are being picked up by the market and magnified in spread moves,” Nomura said in a note to clients. “A case in point was yesterday’s T-bill auction by Portugal.”

Portugal added to investor jitters on Wednesday after it cut its planned T-bill placement because yields spiked from January’s placement on Greek concerns. [

Portuguese five-year credit default swaps hit a record high of 216 basis points from 196.2 bps late on Wednesday. This means it costs 216,000 euros per 10 million euros of exposure. Greek and Spanish five-year CDS also rose. MSCI world equity index (.MIWD00000PUS: ) fell 0.6 percent while the FTSEurofirst 300 index (.FTEU3: ) lost 0.8 percent.

Banks took the most points off the index. Santander (SAN.MC: ), the euro zone’s biggest bank, lost 2.8 percent after traders pointed to concerns over the outlook for crisis-hit Spain and worries the bank is not doing enough to address its property exposure despite results beating forecasts.

U.S. stock futures fell around 0.5 percent, pointing to a weaker open on Wall Street.

Japanese stocks fell 0.5 percent (.N225: ) with Toyota Motor (6753.T: ) sliding further on its recall woes.

Emerging stocks (.MSCIEF: ) dropped 1.2 percent.

U.S. crude oil fell almost 1 percent to $76.24.

Bund futures rose 16 ticks.

Stock Investing

(Additional reporting by Neal Armstrong, editing by Mike Peacock)

Fiscal worries drive euro lower; stocks fall